Auguries From North Block

The Budget is expected to be soft but with sufficient innovation in terms of fresh revenue proposals to satisfy the Harvard scholars roformist zeal

Finance minister P Chidambarams job has a lot in common with the famous medieval horse torture. His Budget has to counter the contradictory pulls within his 13-party government with, first, the crisis in government finances and, second, the expectations of foreign and domestic investors who have been riding the crest of economic growth for the past three years.

The odds, clearly, seem to be stacked against the pro-reform finance minister.

As he readies to present his second consecutive Budget the big question is: how will he handle these opposing forces? And, as crucially, how will all this translate in the Budget?

 

In North Block there are two views. Some say the finance ministers initial optimism has waned after the governments decision to to accept the left proposition for a higher food subsidy bill. Others still believe that the minister is unlikely to give up without a challenge.

Both are probably right. That is why, observers expect the Budget to be mostly soft but with sufficient innovation in terms of fresh revenue proposals and expenditure control measures to satisfy the Harvard scholars reformist zeal.

The agenda is expected to include among other things, renewed impulses to curb the burgeoning fiscal deficit including a statutory cap on the governments annual borrowings and a further fillip to the process of tax reforms. In broad terms, ministry officials describe the Union budget for 1996-97 as being growth-oriented, further tax reforms, stimulating industrial growth and giving a fresh boost to exports. The expectations

In July 1991, the economy was in the doldrums and even a marginal turnaround was sufficient to win kudos for the then finance minister Manmohan Singh.

Six years down the line with the economy seemingly bouncing back to an unprecedented growth path averaging a record 6.5 per cent in the Eighth Plan period and topping 7 per cent in the two years ended 1995-96 the expectations have gone overboard.

Further, the foreign institutional investors who were marginal players till a few years ago, today have the market in a virtual stranglehold. This is especially true with the domestic financial institutions, like UTI, hamstrung for resources in the wake of the liquidity crunch and hence unable to pull their weight in the market.

As a result, anything unfavourable from the point of the view of the FIIs would set the pace in the customary hour of trading that takes place after the presentation of the annual Budget. The finance ministry, though it will not admit so, is fairly conscious of the pressures exerted by the FIIs and will therefore have in store a clutch of appropriate proposals.

Similarly, the minister will also have to cater to the populist sentiments that abound in government and the opposition and ensure that social spending continues to be the holy cow. This has to be achieved despite the fact that the government has to provide for not only additional allocations in food subsidy but also account for the recommendations of the Fifth Pay Commission.

If the hints in the Economic Survey are any pointer, it is evident that the minister will set out an ambitious divestment agenda to make up for the enhanced spending in the social sector and by way of wages and salaries in government. A refined expenditure control mechanism, already tried out in the current fiscal year with the saving of over Rs 3,000 crore in the targeted plan expenditure, is likely to be spelt out in the budget.

The proposals the finance minister is expected to kick off the budget proposals by

highlighting his ability at having contained any major spillover in the fiscal deficit

targets. Initially, the ministry had argued that the fiscal deficit target would slip but marginally to about 5.2 per cent of gross domestic product compared with the target of 5 per cent.

Not only will Chidambaram be the first finance minister to do this in the last decade, he would have done so against the background of the fact that the government was restricted by time. The United Front government had only seven to eight months to effect its revenue proposals after the last Budget was presented on July 22. Most governments get a year.

This was despite the fact that the finance ministry has been under pressure on account of the fact that revenue receipts under some heads have been sluggish and has been forced to accommodate, among other things, additional expenditure for defence and special plan assistance to Jammu and Kashmir. In 1996-97, the finance minister is expected to project a fiscal deficit target of 4.5 per cent of GDP in the next financial year.

The minister is also expected to propose a statutory cap on the fiscal deficit of the Centre and discontinue the current practice of financing the budget deficit by printing money against the issue of ad hoc treasury bills.

The idea of a sinking fund has been suggested to ensure not only greater transparency and also avoid contingency measures in view of the governments rising debt burden. The sinking fund would be created by earmarking a portion of the centres receipts including revenue collections. This would then be used to discharge the Centres annual debt obligations.

The government is also slated to include its maiden international sovereign borrowing in the budget to ensure transparency and also parliamentary approval for the entire transaction. The move will also alleviate the pressure on domestic interest rates since part of the annual borrowings or fiscal deficit will be raised abroad.

The direct tax changes on the anvil include the withdrawal of double taxation of dividends, reduction in individual tax rates through a rationalisation of the present income tax slabs and a tax on expenditure targeting professionals like doctors and engineers. While the controversial minimum alternate tax or MAT will be retained, sources aver that the tax changes would render it superfluous and thereby take away the sting.

These are likely to form a critical part of the finance ministers proposals in the Union Budget for 1997-98. The proposals have been taken up from the recommendations put up by a team of consultants from Arthur Anderson and Mckinsey. The giveaways being considered by finance ministry is expected to cost the state exchequer Rs 3,000 crore.

Tax experts opine that if the proposals eventually go through it would mean a steep reduction in the rates for the first slab of income tax. They however felt that this would require major amendments to the Income Tax Act.

It is understood that the consultants recommendations have been drawn from the experience of some of the East Asian countries and Israel. Experts explained that Israel had in place a sophisticated presumptive tax structure that drew on acquisitions like cars, telephones etc to determine the marginal rate of taxation.

The finance ministry is looking to expand the scope of the expenditure tax (which is essentially a presumptive tax) as part of its steps to explore fresh avenues of raising direct tax collections.

Policy changes relating to indirect taxes will entail a further reduction in the average level of tariffs to about 30 per cent from the present level of 40 per cent. The peak tariff rate is likely to be retained at last years level.

The minister is also expected to effect some simplifications in tax procedures, including the setting up of an advance tax ruling body for bulk imports. The bodys ruling is expected to usher in greater transparency, leave less scope for disputes and preclude delays in project completion.

This would be over and above the package of measures on the anvil for spurring infrastructure investments, revving up export growth and selective expansion of social sector spending. The former would include a more flexible package of investment norms for insurance and provident funds, which would allow select public sector institutions to access a portion of the corpus.

In the final analysis, it appears that the finance minister may still jolt the form book and surprise his critics.Whether it will go down well with the bourses, which seem to be afflicted by pre-Budget nerves, only the customary hour of trading on Budget day can tell.